Loopholes for institutional investors soon to be closed

The Real Estate Transfer Tax is by far the most important tax owed not to the federal government, but to the German federal states. Their increased need to fund multiple projects – from infrastructure to refugees and displaced people - has led to a significant increase of the Real Estate Transfer Tax as one of the principal sources of income for the “Länder”. In North Rhine Westphalia, the most populous “Land” with almost 20 Million inhabitants, the corresponding tax rate has been risen form 3,5% to 6,5% during the last years, an extremely considerable rise.

So far institutional investors have known how to avoid that development for their commercial transactions with an easy trick. Instead of purchasing the piece of real estate with an Asset Deal, they regularly turn to a Share Deal, buying not the piece of real estate and building itself, but the shares of the corporation that owes it. Such a transaction is exempt of Real Estate Transfer as of today, as long as not only one buyer is involved, which would be considered an act of tax avoidance. However, as long as at least a second buyer is taking part in the transaction, purchasing a minimum of 5% of the shares, being the further 95% purchased by the main buyer, no Real Estate Transfer Tax will accrue.

This practice has been considered a vexation by the individual house buyers, who are fully suffering the substantial rise of tax rates. Politicians now have decided to pick up this subject. The Finance Ministers of the “Länder” have recently jointly agreed to present a plan before the end of the year about how to close that loophole in the near future. Thus institutional investors should make sure to hurry up if they indend to still take advantage of the current and extremely beneficial legal situation.